Day 1 Of A New Rally Attempt


Wednesday, January 27, 2010 Market Commentary

The major averages positively reversed on Wednesday which marked day 1 of a new rally attempt. It was encouraging to see volume expand compared to the prior session which indicated that large instiutions were accumulating stocks. Decliners led advancers by a 10-to-9 ratio on the NYSE and trailed by a 5-to-8 on the Nasdaq exchange. There were 10 high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page, higher than the 6 issues that appeared on the prior session. New 52-week highs still outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

Fed Decision and The Economy:

The big news of the day occurred at 2:15pm EST when the Federal Reserve held rates steady and raised their outlook on the economy. In the after meeting commentary, the Fed said it believes “economic activity has continued to strengthen” since its last meeting in December. However, the Fed did not repeat its view that the housing market continues to improve. Investors are concerned that the global economic recovery will be threatened as the Federal Reserve and the European Central Bank begin to curb their massive stimulus measures. They are also concerned that central banks in China, India, Brazil, Israel and Australia might begin aggressively raising rates. In addition to reiterating its stance of leaving rates steady for an “extended period of time” the Fed confirmed its plan to end its program that bought mortgage-backed securities in March.

More Ominous Housing Data

News on the economic front was less than stellar specifically in the ailing housing market. The Commerce Department said new-home sales plunged by -7.6% to an annual pace of 342,000 which is the lowest reading since March 2009! The report showed that for all of 2009, sales skidded -23% to 374,000 which was the lowest reading since records began in 1963! The negative housing data followed a string of weaker than expected reports released earlier this week.

Market Action: Day 1 Of A New Rally Attempt

Looking at the market, Wednesday marked Day 1 of a new rally attempt which means that as long as Wednesday’s lows are not breached, the earliest a possible follow-through day could emerge will be this Monday. However, if Wednesday’s lows are taken out, then the day count will be reset and the chances for a steeper correction increase markedly. It is also important to see how the major averages react to their respective 50 DMA lines. Until they all close above that important level the technical damage remaining on the charts is a concern. So far, the market’s reaction has been tepid at best to the latest round of economic and earnings data. Remember that the recent series of distribution days coupled with the deleterious action in the major averages suggests large institutions are aggressively selling stocks.  Disciplined investors will now wait for a new follow-through day to be produced before resuming any buying efforts. Until then, patience is key.

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